Personal care goods firms need to sell more to sustain growth

Wednesday, July 08, 2009

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The growth in the coming months would depend more on selling larger quantities rather than through higher price realization. In 2009, companies started cutting prices, or did not raise them because of the decline in inflation.

The growth seen in companies making personal and home care products in the past year and a half is set to slow significantly, analysts said.

“While the signs of slower growth are already visible, the decline will be sharper from the second quarter onwards,” said Anand Shah, an analyst with Mumbai-based brokerage Angel Broking Ltd.

Retail data from market research agency ACNielsen for April and May reflects the trend. The data, quoted in a 25 June report published by Mumbai-based brokerage ICICI Securities Ltd, indicate the sector grew only 16.2% in the period, compared with 19% in the same period the previous year.

ACNielsen did not respond to Mint queries sent on 25 June.

The growth in the coming months would depend more on selling larger quantities rather than through higher price realization.

“For the second quarter of the current fiscal, value growth will not be as much as the first quarter ended March. Most of the growth will be volume driven,” said Vanmala Nagwekar, research analyst at brokerage India Infoline Ltd.

“The impressive growth registered by companies in the past few quarters was on account of steep price increases,” Shah said. “This advantage has now gone as companies have had to cut prices because of inflation, slowing consumer demand and because of the decline in the economic sentiment over the past two quarters or so.”

Hindustan Unilever Ltd (HUL), Colgate-Palmolive (India) Ltd and ITC Ltd, among others, increased prices of various products by around 5-20% in 2008.

“Going ahead, the value growth will not be very high as companies are resisting price hikes, so the value growth will get restricted to only 3-4%,” Shah said.

The analyst said turnovers of most makers of personal and home care products grew 18-20% during this period and almost 10% of this growth was due to price hikes.

In 2009, however, most companies started cutting prices, or at least did not raise them because of the steep decline in inflation and the cost of input materials such as palm oil and packaging material.

HUL, for instance, has cut prices of its products by up to 20% in the past few months, whereas firms such as Dabur India Ltd and Godrej Consumer Products Ltd have held to their 2008 prices.

Companies, however, expect that volumes will grow much faster now compared with previous quarters.

“On the back of the cost push in FY09, which caused revenue growth for most companies to come through inflation, the growth in FY10 is likely to be led by volumes,” said Milind Sarwate, chief human resources and strategy manager at biscuit and hair-oil maker Marico Ltd.

While reducing prices, most companies have increased package sizes of products to pass on the benefits of lower input costs to consumers. This is expected to result in better growth in volumes in the next few months.

“In real terms, the consumption growth rate will be higher if you take free quantities into consideration... In a lot of categories, higher quantities are being given to consumers at the same price,” said Anil Chugh, senior vice-president at Wipro Consumer Care and Lighting.

Most companies are also pushing volumes through attractive offers. “HUL, for instance, is going big on promotion of small-sized packs in key categories such as creams and oral care. They have also increased commissions to retailers in order to push volumes,” said India Infoline’s Nagwekar.

According to the ICICI Securities report, the sector saw robust volume growth as growth in only three out of the 10 categories slowed.

Even as sales growth in value terms is expected to slow, some companies argue that it will still be quite impressive. “The growth rates will come down from, say, 20% as witnessed in 2008-09, but they will still be in double digits in the range of 12-15%,” Chugh said.

Some companies, however, argue that there will be no dent in the growth rate and the sector will continue to grow impressively. “ACNielsen numbers are only indicators and an average of all the categories put together,” maintained H.K. Press, executive director and president at Godrej Consumer Products.

“On an overall basis, consumer categories have not been impacted at all, especially the mass-market segment, so we have not seen slower growth,” Press said.